If a lender agrees to write off or cancel a portion of a debt in exchange for the borrower paying a percentage of the total debt, this is a cancellation of debt. This is similar to a deficiency write-off by a mortgage company when a house is foreclosed. The amount of the mortgage left unpaid is income to the borrower because he never has to pay it back. In the case mentioned above, the situation is slightly different. That borrower is somewhat in luck because of the American Recovery and Reinvestment Act of 2009. Under §108(i) of that act, he will be able to defer recognizing cancellation of indebtedness (COD) income from the reacquisition in both 2009 and 2010 and spread the income over 5 years for tax purposes. Anyone in this situation should contact his tax preparer for more details. If the income results in tax he cannot pay immediately, an Installment Agreement or other arrangement can be made with the IRS to retire the debt.